Fannie Mae (FNMA)

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From Friday - Prospects for Fannie-Freddie reform 'brighten' and may favor shareholders

BY MarketWatch
— 12:55 PM ET 12/08/2017



Bipartisan consensus on one of the thorniest issues left unfinished from the financial crisis?

Prospects for an overhaul of the housing finance system are "brighter" as fresh legislation advances through Congress, one analyst believes.

Senators Bob Corker and Mark Warner are working on a bill to decide the fates of Fannie Mae (FNMA)and Freddie Mac (FMCC), the two government-sponsored enterprises still lingering in a financial-crisis-era limbo. That question has taken on some urgency in recent weeks as the time nears when the two companies no longer have any capital cushions, as directed by Congress, yet will likely need to tap taxpayer dollars if proposed tax law changes slash the value of tax credits they hold on their balance sheets.

Read:Here's what else tax reform means: another bailout of Fannie and Freddie (http://www.marketwatch.com/story/heres- what-else-tax-reform-means-another-bailout-of-fannie-and-freddie-2017-12-05)

There are still big questions to be determined, and Congress has its hands full with other financial services priorities, wrote Capital Alpha's Charles Gabriel. Still, he said, some of the broad outlines of the plan that's emerged seem to be gaining traction and garnering compromise.

"Specifically, we see the shifted Corker-Warner stance toward a continued GSE role and some concessions to shareholders as potentially reducing or removing barriers to reform," Gabriel wrote late Thursday. "And we thus expect it to importantly change the threshold debate."

Among the biggest shifts: House Financial Services Committee Chairman Jeb Hensarling's acknowledgment (https:// financialservices.house.gov/news/documentsingle.aspx?DocumentID=402755)that he recognizes the political necessity of keeping some form of government guarantee for mortgages.

"Although I hate to have the federal government in the position of deciding which mortgages can be securitized, with $ 5.7 trillion in guarantees, decide it must," Hensarling said Wednesday (https://financialservices.house.gov/news/ documentsingle.aspx?DocumentID=402755).

The broad outlines of the Corker-Warner plan suggest that Fannie(FNMA) and Freddie(FMCC) 's investment portfolios would be wound down, and future mortgages would be explicitly guaranteed by a government agency led by Ginnie Mae, the agency that currently securitizes mortgages from the Federal Housing Administration and Veterans Administration, with a wrap from a federal mortgage insurance agency that would be created later.

Read: It's not just lobbyists who say tax reform will slash home prices (http://www.marketwatch.com/story/its-not- just-lobbyists-who-say-tax-reform-will-slash-home-prices-2017-11-22)

But as Gabriel notes, compromise on the contours of the future housing finance system may be easy compared to untangling what's owed to shareholders.

Between the 2008 crisis bailout and a 2012 amendment to that agreement, which siphoned the enterprises' profits to Treasury, shareholders have been nearly wiped out, and years of fighting the government in court have done little to settle the matter.

There are two classes of equity in both companies: preferred and common. Bloomberg and Politico reported this week that the current proposals would boost the preferred shares, but leave the common ones out.

"This messaging seemed puzzling in that it might devalue the government's own 79.9% equity stake in the two Enterprises," Gabriel wrote. "But, as some observe, it might be attractive to Senator Corker in settling scores with hedge funds and shareholder groups with whom he has tangled for several years."

On Thursday, shares of the preferred stocks surged while the common class of shares stumbled.

There are still many open questions and constituencies to please before reform is finalized. Earlier attempts at overhauls, including one from Corker and Warner, failed. Even despite the recent momentum, Gabriel thinks there's only a 35% change of comprehensive housing finance reform next year.

Still, as he wrote, "We think Fannie-Freddie investors may finally be on the verge of seeming less as outliers, which could attract additional capital, from heretofore fence-sitting institutional firms, as well. As for the common vs preferred struggle, we'll leave it to others to see the future, though we doubt a negative verdict with regard to the former might be that quick or easy to assume.

Read: An old fear returns as new mortgage market players rise (http://www.marketwatch.com/story/an-old-fear-returns- as-new-mortgage-market-players-rise-2016-02-29)

-Andrea Riquier; 415-439-6400; [e-mail]

(END) Dow Jones Newswires
12-08-17 1255ET
Copyright (c) 2017 Dow Jones & Company, Inc.


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